The failure and collapse of Santa Clara-based Silicon Valley Bank (SVB) Financial Group earlier this year has sent shock waves across the investment world of venture capital companies involved in life science and biotech companies.
According to Forbes’ 14th annual look at America’s Best Banks, published on February 16, 2023*, SVB ranked as #15 out of the 100 largest publicly-traded banks based on growth, credit quality and profitability, managing client fund of US $ 342 billion and US $ 74 billion in loans and it’s failure is the largest bank failure since the failure of Washington Mutual in 2008, which was one of the trigger events of the global financial crisis.
The initial panic resulted in the bank’s clients transferring their assets to other banks.
Shortly after the collapse and closure of the SVB by the California Department of Financial Protection and Innovation, the Federal Deposit Insurance Corporation (the US Regulator) created Silicon Valley Bridge Bank and transferred all of the deposits—both insured and uninsured—and substantially all assets and all Qualified Financial Contracts of Silicon Valley Bank to the bridge bank. The purpose of establishing Silicon Valley Bridge Bank was to allow time for the FDIC to stabilize the institution and market the franchise.
First Citizens Bank and Trust Company (Raleigh, North Carolina) agreed to purchase Silicon Valley Bridge Bank from the FDIC. essentially allowing the 17 former SVB branches to open under new First Citizens’s management.
According to financial reports, this take-over of SVB gives First Citizen nearly US $56 billion in deposits and approximately US 72 billion in assets at a projected discount of nearly US $ 16 billion. In addition, FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately US $ 20 billion. The exact cost will be determined when the FDIC terminates the receivership.
Good News : Band News
And while this is essentially good news for First Citizen (the bank is now of the America’s 25th largest banks), the acquisition of the retail business of SVB is, in essence, just a small part of the rescue operation.
As a result, investors and venture capital companies were largely in limbo after start-up focused SVB filed for court-supervised reorganization under Chapter 11 for the company’s non-retail bank operations, including its investment unit SVB Securities, wealth management company Boston Private and equity research firm MoffettNathanson, estimated to be worth in excess of US $ 90 billion.
SVB and Biotech
With takeover of Leerink Holdings, a Boston-based parent company of Leerink Partners, a leading investment bank focused on the Healthcare and Life Science industries, for US $ 280 million in November 2018, SVB had made big bets in the industry. And while the exposure of biotech, life science and pharmaceutical companies to SVB was relatively limited, estimated to be approximately 12% of the total deposits, it was, however, not insignificant either.
At the time, the takeover of Leerink represented an important step for SVB, which attempted be to become an indispensable company-building partner to biotech, life science and pharmaceutical companies, especially startup-biotech.
SVB’s importance in this industry grew especially as a result of major investments in biotech, life science and pharmaceutical companies during the COVID-19 pandemic, when funding for health care grew exponentially. This growth let to SVB to provide financial services to nearly half of all venture-backed technology and life sciences companies in 2022.[1] In addition, SVB also managed funds for large investment groups, including Bain Capital which invests in companies that drive medical innovation to improve the lives of patients with unmet medical needs, and Polaris Partners, which invests in invests in healthcare and technology companies across all stages from founding to profitable growth.
This growing focus on biotech, life science and pharmaceutical companies made these clients especially vulnerable.
Exposure abroad
Outside the United States, SVB was heavily involved in investments in (bio-) technology.
In the 1990’s the company established relationships with Asian and Chinese companies and venture capital fund, establishing a first China subsidiary, SVB Venture Capital Management (Shanghai) Co., in 2005 and a second subsidiary, SVB Business Partners Beijing Co., in 2010.
SVB also played a key advisory role in working with their US-based clients expansion into China, invested in a loan guaranty company headquartered in Hangzhou, manage two local renminbi funds for the Yangpu District and (in 2012) established SPD Silicon Valley Bank, a joint-venture bank with the Shanghai Pudong Development Bank, listed on the Shanghai Stock Exchange in 1999.
Noel Quinn, HSBC Group Chief Executive.Takeover by HSBC
HSBC’s acquisition of SVB UK for UK £ 1.00 (US $ 1.23)** following the collapse of its parent company may result in new opportunities for biopharmaceutical companies.
“The acquisition makes excellent strategic sense for our business in the UK,” explained Noel Quinn, HSBC’s Group Chief Executive.
“It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life science sectors, in the UK and internationally,” he added.
Venture funding
According to analytics company GlobalData‘s Pharma Intelligence Center Deals Database, SVB and its global subsidiaries were involved in over US $1.4 billion in total venture financing raised from 2010 to 2022 for drug development. In 2018 alone, the company invested over $400 million in venture financing.
“The access to increased capital and international presence that HSBC provides could allow for the potential for biopharmaceutical companies to improve investment in the development of therapies,” noted Sharon Cartic, MSc, Associate Director of Business Fundamentals at GlobalData.
“2020 was a record year for venture financing; however, 2021 and 2022 saw less investment as recovery from the COVID-19 pandemic, the Ukraine crisis, and inflation caused market volatility, which resulted in a less favorable environment for risk-averse investors across the biotech industry,” Cartic added.
Access to funds
The acquisition of the UK branch of SVB, allowed HSBC customers to continue to bank as usual, safe in the knowledge that their deposits are backed by the strength, safety and security of HSBC.
According to Steve Bates OBE, the Chief Executive Officer of the UK BioIndustry Association (BIA), nearly 40% of biotech and life science companies backed by venture capital banked with SVB UK, making the company incredible valuable.
The takeover saved the heavily-exposed UK- and EU-biotech and life science sector from collapse. However, expected fallout of SVB’s collapse could still hamper venture funding in the biotech, life science and pharmaceutical sector, which both UK and EU-governments believe is imperative to the future growth of the regions.
“Now we have a major UK bank backing the UK life science industry. HSBC has acquired some great new and growing life science customers and kept the doors of some of the UK’s fastest-growing life science companies open,” Bates concluded.
The Netherlands-based biopharmaceutical company Pharming Group, which develops innovative protein replacement therapies and precision medicines for multiple rare diseases, stated the HSBC acquisition of Silicon Valley Bank UK would allow access to its US $ 19 million deposit and not bear losses.
Other European biopharmaceutical companies stated they also expect to recover their deposits. Danish Zealand Pharma, which is involved in the discovery and development of innovative peptide-based medicines, expects to recover its US $ 23.4 million in deposits.
Filling the void
The collapse of the SVB left a real void that goes beyond just capital. SVB had a reputation of helping venture capital with insight into industry trends. In addition, the company provided a unique service with banking experts helping start-ups to maneuver the fundraising maze, connect with investors, and provide candid advice on how to increase the probability of success.
“SVB was a leading provider of venture debt, a type of financing in the form of a loan used by early-stage startup companies to raise capital. It remains to be seen how the void left by the collapse of the bank will be filled and whether there could be a slowdown in venture debt, GlobalData’s Sharon Cartic said.
“However, the acquisition of SVB UK by HSBC could provide greater access for biopharmaceutical startups to international markets and global networks of investors. This could open doors to greater biopharmaceutical and startup company collaborations in driving innovation for drug development,” Cartic noted.
I addition, the take over by SVB UK could also help biotech, life science and pharma get access to capital and a (larger) international presence that HSBC provides and improve investment in the development of therapies,” she added.
“So, I would be happy to see HSBC really fill the void left by SVB and not only rescue the banking business but also take over the much more complex, but much needed strategic investor support and start-up friendly approach for (early stage-) drug development companies which represented a much larger part of SVB’s UK and European business,” she concluded.
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Note: * The Forbes report was published less than one month before SVB collapsed on March 10, 23. The information was based on growth, credit quality and profitability in the 12 months through September 30, 2022, ranking the 100 largest (by assets) publicly-traded banks and thrifts from best to worst.
** The deal brings the staff, assets and liabilities of SVB UK into the HSBC portfolio, but excludes those of SVB UK’s parent companies.
Reference
[1] Q4 Financial Highlights. SVB. January, 19, 2023. Online. Last accesses on March 31, 2023.
Featured image: HSBC Lion, London, UK. Photo courtesy: © 2023 HSBC. Used with permission.
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